Ferma urges EC not to introduce mandatory sustainability governance rules

Ferma has told the EC it is against mandatory EU-wide due diligence rules on corporate sustainability because they would add administrative costs and reduce the competitiveness of European firms. The federation has instead put its weight behind non-binding guidelines and standards to boost ESG risk management.

Ferma was responding to the recent public EC consultation on sustainable corporate governance that closed last week. The EC wants to ensure that sustainability is further embedded into corporate governance, potentially through a revamped EU regulatory framework to tackle risks in companies’ own operations and supply chains.

A range of respondents to a study informing the EC consultation support the introduction of mandatory due diligence across the EU to ensure companies address the adverse impacts of human rights, health and environmental issues in their supply chain.

But Ferma has told the EC it is against this, and instead thinks companies should be asked to follow existing guidelines.

“It is our view that existing processes and frameworks such as ERM already encourage companies to look at the ‘risks’ and ‘impact’ in companies’ operations throughout the supply chain,” the federation told the EC.

It believes that tackling ESG risks in the supply chain is best addressed by “further encouraging companies to develop and maintain a holistic risk management approach”.

Ferma said the EU should therefore develop and support guidelines and standards, rather than create mandatory requirements, if it wishes to address this issue.

Instead of a new legal framework, Ferma urged the commission to consider providing some non-binding recommendations or good practices, accompanied by a guiding ‘comply or explain’ principle. Ferma added that measures taken can be conveyed in existing reporting requirements, such as through the Non-Financial Reporting Directive.

Ferma argued that the introduction of mandatory due diligence requirements would put European firms at a competitive disadvantage, increase administrative costs and penalise smaller companies with fewer resources. It also fears it would reduce attention on core corporate activities, create difficulties in finding suitable suppliers and encourage disengagement with risky markets, which could hurt local economies.

But Ferma used the consultation to welcome the EU objective of instilling long-term corporate sustainability in corporate governance.

“As the association representing European risk management professionals, Ferma is encouraged to see the idea of using a risk management approach to ESG. However, we are of the view that creating an EU legal framework on supply chain due diligence would be sub-optimal,” it said.

Ferma told the EC it prefers the “minimum process and definitions approach”, with risk-based requirements that are proportionate to the nature, scale and complexity of each organisation. “Such processes also steer thinking away from a short-term perspective and help map out likely impacts on a wide variety of stakeholders,” stated Ferma in its response.

Ferma also told the EC it believes directors should take account of stakeholder interests and maximise social and environmental performance in tandem with financial returns. At the same time, it argued there should be a clear perimeter on the type of stakeholders that fall under directors’ duty of care.